According to Dick Cotton in Retirement Cafe, one of the most common mistakes retirees make is looking at a good return on a nearly risk-free investment and concluding that they would do better in the stock market because it has a higher long-term average return.

Long-term market return averages are interesting when an investment portfolio isn’t used to fund specific future liabilities (expenses). Once an investor begins to spend periodically from that portfolio, they introduce sequence-of-returns risk. They’re trying to fund many expected future annual expenses and not knowing the price they will receive for those future stock sales introduces risk. The sequence of returns is often more important than long-term market return averages.

And, don’t forget Occam’s Razor. In Dick Cotton’s experience, cute, complex or tricky strategies to fund retirement are generally flawed. The simplest answer is generally the best. Retirement advice contains many strategies that are “too cute by half.”

There is a role for stocks in an adequately-funded retirement plan; providing secure income isn’t it. Long-term average stock returns aren’t the key issue. The analysis isn’t as simple as comparing expected returns. You can drown in a river that averages a foot deep and you can go broke in a market that averages 9% returns over the long-term.

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